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Table of Contents

List of Forms by Chapter

Chapter 1 — Considerations In Electing S Corporation Status

Chapter 2 — Electing S Corporation Status

Chapter Summary

I. Introduction

[2.1] What Is an S Corporation and How Many Are There?

What Tax Advantages Are There for Filing an S Corporation Election?

[2.2] Pass-Through Tax Treatment

[2.3] Owner Salary Effects In an S Corporation

[2.4] Offset of Losses Against Owner Income from Other Sources

[2.5] Maintaining S Corporation Status

II. Requirements To Elect S Status

In General

[2.6] A Small Business Corporation

[2.7] No Disqualified Non-Individual Shareholders

[2.8] Unissued Stock Does Not Count as a Second Class of Stock

[2.9] Restricted Bank Director Stock

[2.10] Deferred Compensation Plan with Currently Taxed Compensation Is Not Outstanding Stock

[2.11] Deferred Compensation Non-Stock Buy-Sell Plans

[2.12] Size of Operations and Activities

[2.13] Domestic Corporation

[2.14] Ineligible Corporations

[2.15] No More than 100 Shareholders

[2.16] Spouses

[2.17] Family Members

Shareholders Must Be Individuals, Estates, Certain Trusts, Tax-Exempt Charitable Organizations, or Qualified Retirement Plans

[2.18] Individuals

[2.19] Estates and Testamentary Trusts

[2.20] Grantor Trusts

[2.21] Voting Trusts

[2.22] Qualified Subchapter S Trusts

[2.23] Requirements To Be a Qualified Subchapter S Trust

[2.24] The Qualified Subchapter S Trust Election

[2.25] Electing Small Business Trusts

[2.26] Election Process

[2.27] Conversion to a Qualified Subchapter S Trust

[2.28] Termination of an Electing Small Business Trust

[2.29] An Electing Small Business Trust as Shareholder and Taxes Imposed

[2.30] Individual Retirement Accounts Owning Stock in a Bank

[2.31] Tax-Exempt Organizations

[2.32] Qualified Retirement Plans

[2.33] Shareholder May Not Be a Nonresident Alien

[2.34] No More than One Class of Stock

[2.35] Buy-Sell and Redemption Agreements

[2.36] Obligations Designated as Debt

[2.37] Call Options, Warrants, and Similar Instruments

[2.38] Straight Debt Safe Harbor

Nonvoting And Voting Shares Allowed Within One Class of Stock

[2.39] General Rule

[2.40] Family Estate Planning Opportunity with Nonvoting and Voting Stock in a Sub S Corporation

[2.41] Qualified Subchapter S Subsidiaries

[2.42] The Election

[2.43] Late Qualified Subchapter S Subsidiaries Election

[2.44] Termination of a Qualified Subchapter S Subsidiaries Election

Maintaining the Subchapter S Election

[2.45] Inadvertent Terminations

[2.46] Election After Termination

III. The Process of Electing S Status

[2.47] The Election and Form 2553 Filing Requirements

[2.48] Shareholder Consents

[2.49] Late Elections

[2.50] Procedure According to Tax Return Filing

[2.51] Additional Documents Under Rev.Proc. 2003-43

[2.52] Automatic Relief

[2.53] Extensions of Time To File Consents

[2.54] Newly Organized Corporations

[2.55] Multi-State S Corporation Registration (Doing Business in Other States with State Income Tax S Corporation Statutes)

IV. Termination of S Election

[2.56] In General

[2.57] Revocation of the S Election

[2.58] Termination by Ceasing To Be a Small Business Corporation

[2.59] Termination Due to Excess Passive Income

[2.60] S Termination Year

[2.61] Other Consequences of S Termination Year

[2.62] Inadvertent Terminations

[2.63] Inadvertent Defective Election

[2.64] No Election Until Five Years After Termination

V. Organizing and Capitalizing the S Corporation

[2.65] In General

Selecting Classes of Common Stock

[2.66] Corporate Factors

[2.67] Tax Factors

The Debt-Equity Mix

[2.68] In General

[2.69] Comparison of Debt and Equity in an S Corporation

Transferring Property to the Corporation

[2.70] Nonrecognition of Gain

[2.71] Receipt of Boot

[2.72] Basis for Stock

[2.73] Assumption of Liabilities

[2.74] Last-In, First-Out Recapture

[2.75] Nonrecognition of Built-In Gains After Five Years

Selection of a Fiscal Year

[2.76] Permitted Taxable Year

[2.77] Internal Revenue Code §444 Election

[2.78] Internal Revenue Code §7519 Payments

[2.79] Comprehensive Example

[2.80] Selection of Accounting Method

[2.81] Shareholders’ Agreements

VI. Appendix — Forms

[2.82] Qualified Subchapter S Trust Election

[2.83] Electing Small Business Trust Election

[2.84] Shareholders’ Consent to S Election

[2.85] Revocation of S Election

Chapter 3 — Operating and Maintaining the S Corporation

Chapter 4 — Passive Loss Rules: Application to an S Corporation and Its Shareholders

Authors

Janelle N. Darnell
Janelle N. Darnell
Janelle N. Darnell is an Associate at McGuireWoods LLP, in Chicago, where she focuses her practice on taxation and mergers and acquisitions, and she will be a Partner as of January 1, 2026. Darnell is a member of the Illinois State Bar Association and the American Bar Association, and she was recognized as a Nolan Fellow by the American Bar Association’s Tax Section for the 2023 – 2024 fiscal year. She currently serves as Vice-Chair of the ABA Tax Section’s S Corporations Committee, and she is the incoming Chair of the Committee for the 2026 – 2027 fiscal year. Darnell received a B.A. from California Polytechnic State University, an M.B.A. from San Diego State University, a J.D. from the University of San Diego School of Law, and an LL.M. from the Northwestern University Pritzker School of Law.
Paul S. Drizner
Paul S. Drizner
Paul S. Drizner is a Partner in the Chicago office of Seyfarth Shaw LLP, where he concentrates his practice in taxation. Drizner is a member of the American Bar Association. He received his B.S. from the University of Illinois and his J.D. from Loyola University Chicago School of Law, where he served as an editor on the Loyola University Chicago Law Journal.
Anthony J. Jacob
Anthony J. Jacob
Anthony J. Jacob is a Partner at Hinshaw & Culbertson LLP, in Chicago, and concentrates his practice in business law, banking and commercial finance law, real estate law, and election law. In 2013 and 2014, respectively, Jacob was appointed as a member of the investment committee for the board of trustees at the University of Illinois Chicago School of Law (formerly known as the John Marshall Law School) and as a board member at the Institute of Illinois Business Law at Chicago-Kent College of Law. He has previously chaired the Business and Securities Law Section Council of the Illinois State Bar Association. Jacob received his B.A. at Northern Illinois University and both his LL.M. and J.D. from the University of Illinois Chicago School of Law, where he was Student Publications Editor of the UIC Law Review and a member of the moot court team.
Alexander Loftus
Alexander Loftus
Alexander Loftus is a Partner at Loftus & Eisenberg, Ltd., in Chicago, where he focuses his practice on business litigation. Loftus has been named a Super Lawyer and is a member of the Illinois Trial Lawyer’s Association, the Illinois State Bar Association, and the Small Business Advisory Counsel. He received his J.D. from DePaul College of Law.

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S Corporations 2026 Edition

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